In a speech yesterday, the Bank of England’s Andrew Hauser explored how potentially issuing a central bank digital currency (CBDC) might impact the central bank’s balance sheet and monetary policy. He concluded that regulated stablecoins and CBDCs could both increase the size of the central bank’s balance sheet. While the size of its balance sheet sounds like an arcane issue, it matters quite a bit and is explored below.
Central bank responses to COVID have meant the balance sheets of numerous central banks worldwide have ballooned. As quantitive easing is gradually reversed, they will contract, at least partially. However, CBDCs and systemic stablecoins are likely to mean the balance sheet size is significantly larger than it once was.
The Bank of England works with a benchmark that the scale of a retail CBDC could be equivalent to current cash in circulation plus 20% of retail bank deposits. Demand for a retail CBDC will depend on its design, such as whether it bears interest, who is allowed to hold it, any holding limits, and where it can be used.
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